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Linux server maker VA Linux Systems said on Wednesday it will stop selling hardware and focus on its applications and online businesses, a move that will significantly cut into the company's short-term revenue but is expected to reduce costs in the longer term.

The hardware and software vendor also said it will lay off 35 per cent of its 436-person staff in an effort to cut costs at the money-losing company. Layoffs will take place during the current quarter, mainly in the hardware services and support divisions. This marks the company's second major staff cuts in the last five months.

VA Linux announced its third quarter earnings on May 22, reporting revenue of $US20.3 million, down from $34.6 million in the same quarter a year earlier. The company also reported wider losses from a year earlier, but said it had about $100 million in cash and securities.

VA Linux made its name selling servers based on Intel processors pre-loaded with versions of Linux from Red Hat, SuSE Linux AG and others. Its prominence in the open-source community helped it launch one of the most successful initial public offerings of 1999, in which its stock catapulted almost 700 per cent in its first day's trading to close at $239.25. It's share price has since tumbled, closing Wednesday at $3.26.

The company said it will stop taking orders for its hardware on July 10 and complete all shipments by the end of its fiscal year on July 28.

VA Linux offers the SourceForge OnSite Collaborative Development System, a Web-based application for collaborating on software development projects. VA Linux said it will work on selling its SourceForge OnSite applications to corporate customers, a similar move made this month by CollabNet, an open source applications company that sells a similar product.

VA Linux will also maintain its Open Source Development Network (OSDN), which includes such developer community Web sites as SourceForge.net, Slashdot and ThinkGeek. It also said it will continue offering software development and consulting services.

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